The oil price war

[David Guyatt]

Great article by William Engdahl. From Voltairenet.org:

Has Washington Just Shot Itself in the Oily Foot?

by F. William Engdahl

By organizing in Iraq and Syria the first war leading to a decline in oil prices, the Obama administration's intention was probably to cripple its adversaries' economies: Russia, Iran and Venezuela. But this policy can have severe unintended consequences in other areas: acceleration of China's development, threats to the dollar's value and a challenge to the economic model predicated on an illusory shale oil bonanza. For William Engdhal, this last manipulation is perhaps the straw that will break the camel's back.

VOLTAIRE NETWORK | FRANKFURT (GERMANY) | 6 NOVEMBER 2014 РУССКИЙ

The collapse in US oil prices since September may very soon collapse the US shale oil bubble and tear away the illusion that the United States will surpass Saudi Arabia and Russia as the world's largest oil producer. That illusion, fostered by faked resource estimates issued by the US Department of Energy, has been a lynchpin of Obama geopolitical strategy.Now the financial Ponzi scheme behind the increase of US domestic oil output the past several years is about to evaporate in a cloud of fictitious smoke. The basic economics of shale oil production are being ravaged by the 23% oil price drop since John Kerry and Saudi King Abdullah had their secret meeting near the Red Sea in early September to agree on the Saudi oil price war against Russia.Wall Street bank analysts at Goldman Sachs just issued a 2015 forecast that US oil prices, measured by a benchmark called WTI (West Texas Intermediate) will fall to $70 a barrel. In September 2013, WTI was more than $106 a barrel. That translates into a sharp 34% price collapse in just a few months. Why is that critical to the US shale production? Because, unlike conventional crude oil deposits, shale oil or tight oil as industry calls it, depleted dramatically faster.A comprehensive new analysis just issued by David Hughes, a Canadian oil geo-scientist with thirty years' experience with the Geological Survey of Canada, using data from existing US shale oil production that has now become public for the first time (the shale oil story is very recent), shows dramatic rates of oil volume decline from US shale oil wells:

"The three year average well decline rates for the seven shale oil basins measured for the report range from an astounding 60-percent to 91-percent. That means over those three years, the amount of oil coming out of the wells decreases by that percentage. This translates to 43-percent to 64-percent of their estimated ultimate recovery dug out during the first three years of the well's existence. Four of the seven shale gas basins are already in terminal decline in terms of their well productivity: the Haynesville Shale, Fayetteville Shale, Woodford Shale and Barnett Shale."

A decrease in oil daily of between 60% and 91% for these best possible shale oil regions means the oil companies must drill deeper to even stay still with oil production, let alone increase total oil volume. That means the drillers must spend more money to drill deeper, a lot more. According to Hughes, the Obama administration Department of Energy has uncritically taken rosy forecast numbers given them by the companies that boost the US shale oil myth. His calculations show future US shale oil output only 10% that estimated for 2040 by the Energy Department.Hughes describes the current deadly dilemma of the shale oil companies as a "drilling treadmill." They must drill more and more wells just to keep production levels flat. The oil companies have already gone after the most promising shale oil areas, so-called "sweet spots," to maximize their production. Now as production begins to decline terminally, they must start drilling in spaces with less rich oil and gas returns. He adds, "if the future of U.S. oil and natural gas production depends on resources in the country's deep shale deposits…we are in for a big disappointment."Oil price collapse

What Hughes describes was the state of shale oil before the start of the Kerry-Abdullah Saudi oil price war. Now US WTI oil prices have dropped a catastrophic 25% in six weeks, and still falling. Other large oil producers like Russia and Iran are in turn flooding the world market with their oil to increase revenue for their state budgets, adding to a global oil supply glut. That in turn pressures prices more.The shale oil and gas bonanza of the past five years in the USA has been built on a foundation of zero Federal Reserve interest rates and huge speculative investment by hungry Wall Street firms and funds. Because of the ultra-rapid oil well depletion, when market oil prices collapse, the entire economics of lending to the shale oil drillers collapses as well. Money suddenly vanishes and debt-strapped oil companies begin real problems.According to Philip Verleger, former head of President Carter's Office of Energy Policy and now an energy consultant, in North Dakota's Bakken shale, one of the most important new shale oil regions, oil at $70 a barrel could cut production 28 percent to 800,000 barrels a day by February from 1.1 million barrels a day in July. "The cash flow will go down as the prices go down, the amount of money advanced to these people to continue the drilling will dry up entirely, so you'll see a marked slowdown in drilling," said Verleger.Myths, Lies and Oil Wars

The end of the shale oil bubble would deal a devastating blow to the US oil geopolitics. Today an estimated 55% of US oil production and all the production increase of the past several years comes from fracking for shale oil. With financing cut off because of economic risk amid falling oil prices, shale oil drillers will be forced to halt new drilling that is needed merely to maintain a steady oil output.The aggressive US foreign policy in the Middle Eastits war against Syria's al-Assad regime, its hardball oil sanctions against Iran, its sanctions against Russian oil projects, its cynical toleration of ISIS in Iraqi oil regions, its refusal to intervene to stabilize the Libyan oil economy but instead to tolerate dis-order are all premised on a cocky view in Washington that the USA is once again the King of Oil in the world and can afford to play high-risk oil geopolitics. The official government agency responsible for advising the CIA, Department of Defense, State Department and White House on energy, the US Department of Energy, has issued projections of US shale oil growth based on myths and lies. That has led the Obama White House to launch oil wars based on those same myths and lies about the rosy prospects of shale oil.This oily arrogance was epitomized in a speech by then Obama National Security Adviser Tom Donilon. In an April 2013 speech at Columbia University, Donilon, then Obama's national security adviser, publicly expressed this: "America's new energy posture allows us to engage from a position of greater strength. Increasing US energy supplies acts as a cushion that helps reduce our vulnerability to global supply disruptions and price shocks. It also affords us a stronger hand in pursuing and implementing our international security goals."The next three or so months in the US shale oil domain will be strategic.

F. William Engdahl

Source
New Eastern Outlook (Russia)

[David Guyatt]

More on the current oil price manipulation to destroy Russia and others (from Global Research)

Russian Roulette: Taxpayers Could Be on the Hook for Trillions in Oil Derivatives

By Ellen Brown
Global Research, December 20, 2014
Web of Debt Blog

Region: USA
Theme: Global Economy, Oil and Energy

1065
170 20

1434

The sudden dramatic collapse in the price of oil appears to be an act of geopolitical warfare against Russia. The result could be trillions of dollars in oil derivative losses; and the FDIC could be liable, following repeal of key portions of the Dodd-Frank Act last weekend.
Senator Elizabeth Warren charged Citigroup last week with "holding government funding hostage to ram through its government bailout provision." At issue was a section in the omnibus budget bill repealing the Lincoln Amendment to the Dodd-Frank Act, which protected depositor funds by requiring the largest banks to push out a portion of their derivatives business into non-FDIC-insured subsidiaries.
Warren and Representative Maxine Waters came close to killing the spending bill because of this provision. But the tide turned, according to Waters, when not only Jamie Dimon, CEO of JPMorgan Chase, but President Obama himself lobbied lawmakers to vote for the bill.
It was not only a notable about-face for the president but represented an apparent shift in position for the banks. Before Jamie Dimon intervened, it had been reported that the bailout provision was not a big deal for the banks and that they were not lobbying heavily for it, because it covered only a small portion of their derivatives. As explained in Time:

The best argument for not freaking out about the repeal of the Lincoln Amendment is that it wasn't nearly as strong as its drafters intended it to be. . . . [W]hile the Lincoln Amendment was intended to lasso all risky instruments, by the time all was said and done, it really only applied to about 5% of the derivatives activity of banks like Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo, according to a 2012 Fitch report.

Quibbling over a mere 5% of the derivatives business sounds like much ado about nothing, but Jamie Dimon and the president evidently didn't think so. Why?
A Closer Look at the Lincoln Amendment
The preamble to the Dodd-Frank Act claims "to protect the American taxpayer by ending bailouts." But it does this through "bail-in": authorizing "systemically important" too-big-to-fail banks to expropriate the assets of their creditors, including depositors. Under the Lincoln Amendment, however, FDIC-insured banks were not allowed to put depositor funds at risk for their bets on derivatives, with certain broad exceptions.
In an article posted on December 10th titled "Banks Get To Use Taxpayer Money For Derivative Speculation," Chriss W. Street explained the amendment like this:

Starting in 2013, federally insured banks would be prohibited from directly engaging in derivative transactions not specifically hedging (1) lending risks, (2) interest rate volatility, and (3) cushion against credit defaults. The "push-out rule" sought to force banks to move their speculative trading into non-federally insured subsidiaries.
The Federal Reserve and Office of the Comptroller of the Currency in 2013 allowed a two-year delay on the condition that banks take steps to move swaps to subsidiaries that don't benefit from federal deposit insurance or borrowing directly from the Fed.
The rule would have impacted the $280 trillion in derivatives primarily held by the "too-big-to-fail (TBTF) banks that include JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo. Although 95% of TBTF derivative holdings are exempt as legitimate lending hedges, leveraging cheap money from the U.S. Federal Reserve into $10 trillion of derivative speculation is one of the TBTF banks' most profitable business activities.

What was and was not included in the exemption was explained by Steve Shaefer in a June 2012 article in Forbes. According to Fitch Ratings, interest rate, currency, gold/silver, credit derivatives referencing investment-grade securities, and hedges were permissible activities within an insured depositary institution. Those not permitted included "equity, some credit and most commodity derivatives." Schaefer wrote:

For Goldman Sachs and Morgan Stanley, the rule is almost a non-event, as they already conduct derivatives activity outside of their bank subsidiaries. (Which makes sense, since neither actually had commercial banking operations of any significant substance until converting into bank holding companies during the 2008 crisis).
The impact on Bank of America, Citigroup, JPMorgan Chase, and to a lesser extent, Wells Fargo, would be greater, but still rather middling, as the size and scope of the restricted activities is but a fraction of these firms' overall derivative operations.

A fraction, but a critical fraction, as it included the banks' bets on commodities. Five percent of $280 trillion is $14 trillion in derivatives exposure close to the size of the existing federal debt. And as financial blogger Michael Snyder points out, $3.9 trillion of this speculation is on the price of commodities.
Among the banks' most important commodities bets are oil derivatives. An oil derivative typically involves an oil producer who wants to lock in the price at a future date, and a counterparty typically a bank willing to pay that price in exchange for the opportunity to earn additional profits if the price goes above the contract rate. The downside is that the bank has to make up the loss if the price drops.
As Snyder observes, the recent drop in the price of oil by over $50 a barrel a drop of nearly 50% since June was completely unanticipated and outside the predictions covered by the banks' computer models. The drop could cost the big banks trillions of dollars in losses. And with the repeal of the Lincoln Amendment, taxpayers could be picking up the bill.
When Markets Cannot Be Manipulated
Interest rate swaps compose 82% of the derivatives market. Interest rates are predictable and can be controlled, since the Federal Reserve sets the prime rate. The Fed's mandate includes maintaining the stability of the banking system, which means protecting the interests of the largest banks. The Fed obliged after the 2008 credit crisis by dropping the prime rate nearly to zero, a major windfall for the derivatives banks and a major loss for their counterparties, including state and local governments.
Manipulating markets anywhere is illegal unless you are a central bank or a federal government, in which case you can apparently do it with impunity.
In this case, the shocking $50 drop in the price of oil was not due merely to the forces of supply and demand, which are predictable and can be hedged against. According to an article by Larry Elliott in the UK Guardian titled "Stakes Are High as US Plays the Oil Card Against Iran and Russia," the unanticipated drop was an act of geopolitical warfare administered by the Saudis. History, he says, is repeating itself:

The fourfold increase in oil prices triggered by the embargo on exports organised by Saudi Arabia in response to the Yom Kippur war in 1973 showed how crude could be used as a diplomatic and economic weapon.

Now, says Elliott, the oil card is being played to force prices lower:

John Kerry, the US secretary of state, allegedly struck a deal with King Abdullah in September under which the Saudis would sell crude at below the prevailing market price. That would help explain why the price has been falling at a time when, given the turmoil in Iraq and Syria caused by Islamic State, it would normally have been rising.
. . . [A]ccording to Middle East specialists, the Saudis want to put pressure on Iran and to force Moscow to weaken its support for the Assad regime in Syria.

War on the Ruble
If the plan was to break the ruble, it worked. The ruble has dropped by more than 60%against the dollar since January.
On December 16th, the Russian central bank counterattacked by raising interest rates to 17% in order to stem "capital flight" the dumping of rubles on the currency markets. Deposits are less likely to be withdrawn and exchanged for dollars if they are earning a high rate of return.
The move was also a short squeeze on the short sellers attempting to crash the ruble. Short sellers sell currency they don't have, forcing down the price; then cover by buying at the lower price, pocketing the difference. But the short squeeze worked only briefly, as trading in the ruble was quickly suspended, allowing short sellers to cover their bets. Who has the power to shut down a currency exchange? One suspects that more than mere speculation was at work.
Protecting Our Money from Wall Street Gambling
The short sellers were saved, but the derivatives banks will still get killed if oil prices don't go back up soon. At least they would have been killed before the bailout ban was lifted. Now, it seems, that burden could fall on depositors and taxpayers. Did the Obama administration make a deal with the big derivatives banks to save them from Kerry's clandestine economic warfare at taxpayer expense?
Whatever happened behind closed doors, we the people could again be stuck with the tab. We will continue to be at the mercy of the biggest banks until depository banking is separated from speculative investment banking. Reinstating the Glass-Steagall Act is supported not only by Elizabeth Warren and others on the left but by prominent voices such as David Stockman's on the right.
Another alternative for protecting our funds from Wall Street gambling can be done at the local level. Our state and local governments can establish publicly-owned banks; and our monies, public and private, can be moved into them.
Ellen Brown is an attorney, founder of the Public Banking Institute, and author of twelve books including the best-selling Web of Debt. Her latest book, The Public Bank Solution, explores successful public banking models historically and globally. Her 200+ blog articles are at EllenBrown.com.

[David Guyatt]

Engdahl, for me, has it spot on in the below essay when he says that the current oil price manipulation results from American oligarchs desperately trying to retain their death grip on global power.

Russia US Sanctions and Stupid CIA Oil Wars

Column: Economics
Region: Russia in the World



The recent headlines talk of a dramatic collapse of the Russian Ruble against the dollar and euro. World oil prices today hover around $57 dollars a barrel. Late August they were over $100. OPEC ministers refuse to act to stabilize prices. The Russian rouble is forced to halt trading in mid-December. Then the US Congress votes yet a new round of economic sanctions against Russia which await President Obama's signature. When we examine all of this more closely it reveals the strategic great confusion of western elites, especially American Oligarchs frantically trying to find ways to hold their grip on global power.I sometimes use the very descriptive adjective "stupid" to speak about the actions of people we are accustomed to think of as anything but stupid. Malevolent, evil, satanic even, you say, but not stupid. Yet more and more I find the description stupid the most appropriate. It is in fact their stupidity in being incapable, in their addiction to power, of seeing the larger global consequences of their tactics or strategies.If we define intelligence as the ability to grasp the interconnectedness of everything in our universe, then we can call stupid those who, despite their vast resources and access to the best minds, are incapable of considering anything outside their tunnel vision narrow world.Cold War worked from 1946-1990 to stabilize their imperial grip on global power over Western Europe, the Third World, Japan and Asia. The end of that Cold War has seen the dramatic erosion of our power as new upstarts like China and Russia and even Iran assert their sovereign rights in the world, we can imagine their thinking: "Well, then let's go back to what worked then. Let's start a new Cold War or even, step by step, a new unconventional global war to retain our American Century, our Project for a New American Century," as Dick Cheney and friends call it.They now try a rerun of their 1986 Saudi oil price collapse strategy to topple Putin, Maduro in Venezuela and Iran according to informed reports from reliable Washington researcher Wayne Madsen.In 1986, Vice President George H.W. Bush, father of George W., together with Secretary of State George Schultz and others convinced Riyadh, as John Kerry did in his September 2014 meeting with Saudi King Abdullah, to run a "reverse oil shock" that had the effect of toppling the over-stretched Soviet Union. It worked in 1986, why not in 2014? Is the thinking of some in Washington.

CIA role and oil price suicide

According to Madsen, who is a former NSA employee with good connections in different factions of Washington intelligence community, it was CIA chief John Brennan and CIA operatives inside the Saudi Aramco state oil company who devised a diabolical strategy of getting the Saudis, along with Kuwait, to flood the world markets with crude and let Wall Street banks like Goldman Sachs, JPMorgan Chase and Citigroup do the rest of the dirty work with leveraged derivative short futures on crude.While I cannot confirm Madsen's assertion that the Saudi flooding perforce will necessarily last another five years after which Saudi production will collapse because the US CIA convinced Aramco against the advice of oil engineers at Schlumberger and other foreign oil services companies not to use salt water injection, that Brennan, who by some who know him has been described as a "knuckle dragger," was poised to implement the Saudi strategy as an anti-Putin move is entirely plausible.Only one problem. The brilliant strategy is ultimately stupid because it is collapsing the US domestic oil industry and hundreds of billions of dollars of planned energy investment globally along with lowering Russian oil dollar revenues and the ruble.
First appeared: http://journal-neo.org/2014/12/21/russia...-oil-wars/

[Magda Hassan]

From what I am reading the Rouble is in a far better state that the US dollar. It is backed by gold for one. Sanctions are causing some limited difficulties in Russia but no collapse at all. On the other hand the lower oil prices are screwing Norway and the UK now and soon the dear friends of the US the Saudi's and most of Gulf monarchies/dictators. Talk about an own goal. With any luck the BRICS will outlive all this and grow strong by sticking together. Sanctions never broke Cuba either.

[David Guyatt]

From what I am reading the Rouble is in a far better state that the US dollar. It is backed by gold for one. Sanctions are causing some limited difficulties in Russia but no collapse at all. On the other hand the lower oil prices are screwing Norway and the UK now and soon the dear friends of the US the Saudi's and most of Gulf monarchies/dictators. Talk about an own goal. With any luck the BRICS will outlive all this and grow strong by sticking together. Sanctions never broke Cuba either.

The things is about these greedy pricks - oligarchs as Engdahl calls them - is that they're wrecking the economies of other people friend and foe - and no matter what happens, they will personally survive very comfortably with their billions stashed away all over the world, thank you very much.